Unforgiven: America's Controversial Attempt to Collect Repayment of Debt from Allied Nations Following the Great War

By Martorelli, Michael A. | Financial History, Fall 2014 | Go to article overview

Unforgiven: America's Controversial Attempt to Collect Repayment of Debt from Allied Nations Following the Great War


Martorelli, Michael A., Financial History


Beginning in April 1917, even before sending troops to fight Germany and the Central Powers, the United States govern- ment began lending billions of dollars to Great Britain, France and other allies to finance their war efforts. At the end of the Great War, the United States emerged as the world's leading creditor nation. In the decade following the November 1918 Armistice, many European governments canceled war-related debt obligations made to each other; but neither congres- sional leaders nor a series of US presidents agreed to any such cancellations. British and French officials were particularly dis- pleased by the attitude of the United States towards its erstwhile European allies.

Making the Loans

Allied countries fighting against Germany and the Central Powers began borrowing funds from American banks as early as 1915. From September of that year until April 1917, several nations borrowed more than $1.6 billion from those institutions. However, the costs of the war were stag- gering, requiring the participants to seek other sources of loans. Eventually they turned to the US government. Immedi- ately after declaring war on Germany in April 1917, Congress passed the first of six Liberty Bond Acts. It called for selling $5 billion worth of bonds to the public, and for lending $3 billion of the proceeds to various allies. Some government officials called for "gifting" the money to France, in exchange for its financial help during the American Revolution. Others called for waiving any interest on loans to that coun- try. But the administration of President Woodrow Wilson decided that the terms of all loans must call for their eventual re- payment and for the payment of an inter- est rate of 5%.

By March 1919, the United States had loaned more than $11 billion to 20 coun- tries; almost three-quarters of that total had been loaned to Great Britain ($4.7 bil- lion) and France ($3.8 billion). About $7.1 billion had been loaned during the war and allocated primarily to the purchase of munitions. Another $3.2 billion had been loaned after November 1918 and had been used for relief and reconstruction efforts, to pay interest on loans taken out before 1917 and to stabilize the value of the British pound and French franc. The loans were technically payable on demand, but Trea- sury Department officials assured their European counterparts that the country had no intention of calling the loans until long after the ending of all hostilities.

Initial Attempts to Set the Repayment Terms

Ever since 1914, Great Britain and France had been lending money to smaller allied countries. The borrowers understood they were incurring financial obligations that eventually would have to be satisfied. As early as December 1917, those two lenders began considering how the unprecedented level of war-related physical and economic destruction would strain the capabilities of their (mostly) European debtors to repay their loans. French Minister of Finance Louis-Lucien Klotz and British Chancellor of the Exchequer Andrew Bonar Law sug- gested to Assistant Secretary of the Trea- sury Oscar Crosby that those three allied lenders consider forgiving some portion of their inter-governmental war debts, since they had all been engaged together in prosecuting the war. Crosby disavowed his authority to discuss the issue.

Immediately after the signing of the November 1918 Armistice, officials from France and Great Britain again began sug- gesting that the Allied countries should discuss the potential pooling and/or can- cellation of their inter-governmental war debts. They thought the United States (by far the largest creditor nation) should can- cel many of its loans, suggesting the funds had been used to support the legitimate war expenditures of all Allied govern- ments. President Wilson and Treasury Secretary William Gibbs McAdoo rejected this idea, asserting that the administration did not have the power to cancel those debts and suspecting that Congress would not approve of such an action. …

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